Of all the huffery puffery in American health policy, what is the most ridiculous? I think a leading candidate is the never-ending lobbying by the American Medical Association and associated medical societies to implement a so-called “doc fix” for Medicare. This refers to U.S. government’s spending on doctors who participate in the Medicare Part B program, through which American seniors receive outpatient care.

The federal government attempts to calculate the price and value of each medical service delivered to Medicare beneficiaries by using a formula called the Resource-Based Relative Value Scale (RVBS). Furthermore, it attempts to limit the total growth of Medicare’s spending on physicians by a method called the Sustainable Growth Rate (SGR), which Congress imposed in 1997.

Physicians cannot stand the SGR because it attempts to limit spending on their services according to growth in real Gross Domestic Product (GDP). (The method’s most recent iteration, in all its glory, is described here.) Because medical costs have been increasing faster than GDP, the SGR is pretty much guaranteed to reduce docs’ fees every year it is in place. However, physicians have successfully lobbied for short-term “fixes” since the SGR started to bite almost a decade ago. Congress has put in the “fix” nine times in nine years. Unfortunately, every time it “fixes” the schedule, the gap between what the SGR calculates fees to be and where Congress actually sets them grows wider.

Physicians, of course, would like a permanent “fix” based on increasing fees based on the Medicare Economic Index (MEI), a measurement of inflation of medical costs. Unfortunately, this will never happen – for two reasons.

First, having the government establish fees for physicians that are based on physicians’ costs is an obvious recipe for fiscal disaster, because a “cost plus” mechanism would create even more incentives to drive up costs. Second, really “fixing” the fees would force Congress to tell the truth about the future costs of Medicare, which it is unwilling to do. Congress proved this during the passage of ObamaCare.

Because a deficit-increasing bill violated a presidential promise, the “fix” had to disappear. The final ObamaCare legislation scrubbed the “doc fix” and left it to be intermittently fixed in other legislation. This year alone, Congress has attempted to fix the fees for a few weeks at a time, the latest effort (on April 15) taking the proposed solution to June 1 – after which it “broke” again because the U.S. Senate declined to pass its “fix” before Memorial Day.

Organized medicine rolled out the big guns. On June 3, the American Medical Association, launched a multi-million dollar ad campaign, attacking the U.S. Senate for taking a “vacation” (actually, a holiday to commemorate veterans’ sacrifices), instead of “fixing a scheduled 21 percent cut to Medicare. . . ” Unfortunately, the AMA does not have an effective alternative.

So, the AMA is a monopolistic supplier of codes that physicians need to submit claims to government-run health-care plans. It’s a declining enterprise: Profits have been slipping from 2003 through 2009. Nevertheless, as long as this is its business model, the AMA will never advocate that the government stop fixing physicians’ fees. And the AMA and the government are always moving the cheese: Last year, they agreed on updates to codes for nearly 200 physician services, which the AMA had identified as wrongly valued. Even after these panicky, short-term measures, Medicare beneficiaries’ access to care is in crisis.

Last October, the Mayo clinic decided that it could no longer accept Medicare patients at its two primary-care clinics in Phoenix. And the media increasingly report other cases. For example, an elderly woman in Virginia Beach, VA, recently called 40 primary-care doctors, none of whom would accept Medicare patients anymore. One can reasonably presume that many patients have had similar experiences without reporting them to the media.

In Texas, where a 2008 survey found that half of physicians were no longer accepting Medicare patients, a 2010 survey found that the numbers declining any participation in Medicare were increasing by 100 to 200 annually. Last year, Houston’s Kelsey-Seybold Clinic, that city’s largest medical practice, announced that it would no longer accept new patients enrolled in the traditional Medicare Part B program, because reimbursements had fallen too low. Almost all of the clinic’s patients have switched to Medicare Advantage plans, most of which negotiate their own payment rates with providers.

Unfortunately, many seniors who have access to Medicare Advantage plans will soon lose them, despite the government’s misrepresenting this consequence of ObamaCare. Kathleen Sebelius, U.S. Secretary of Health & Human Services, recently sent a piece of appallingly inaccurate junk-mail to Medicare beneficiaries, which contained the falsehood that “Your Medicare benefits won’t change – whether you get them through Original Medicare or a Medicare Advantage plan.” In fact, the Chief Actuary of the Center for Medicare & Medicaid Services estimates that 7.4 million Medicare beneficiaries will lose their Medicare Advantage plans by 2017, one half of those who would have enjoyed that choice under pre-ObamaCare Medicare.

The fundamental problem with Medicare’s fees is not where the government fixes them, but that the government fixes them at all. The economist who designed the system, first implemented in 1983, determined Medicare’s fees as follows: “He put together a large team that interviewed and surveyed thousands of physicians from almost two dozen specialties. They analyzed what was involved in everything from 45 minutes of psychotherapy for a patient with panic attacks to a hysterectomy for a woman with cervical cancer. They determined that the hysterectomy takes about twice as much time as the session of psychotherapy, 3.8 times as much mental effort, 4.47 times as much technical skill and physical effort, and 4.24 times as much risk. The total calculation: 4.99 times as much work. Eventually, Hsiao and his team arrived at a relative value for every single thing doctors do.” (See p. 86 of Mayes & Berenson.)

This nonsense continues – and feeds the AMA’s coffers – unto this very day. A physician has three choices with respect to participating in this system – none of which is very appealing. She can simply accept the government’s fees. If she wants to make her life a lot more complicated in return for a little more money, she can opt to become a non-participating provider, which means that she must bill her patient directly and the patient can submit a claim to Medicare. However, in this case, she may only charge a fee that is effectively 9 percent higher than the government’ fee.

Finally, she can bail out of Medicare entirely and charge her patients whatever they are willing to pay. However, in this case, Medicare will not reimburse patients. So, it is unlikely that many Medicare beneficiaries can patronize such a physician. (Medicare Part B premiums, which the government deducts from beneficiaries’ Social Security, only pay one quarter of the cost of Medicare Part B. So, although Medicare Part B is voluntary, seniors who do not participate abandon a huge subsidy.)

This system cannot be fixed: It would be far better for the federal government simply to pull the plug on the entire mechanism and convert Medicare Part B to a system of vouchers, which would limit taxpayers’ liability. In return for this hard budget, the government would allow physicians to charge whatever fees they and their patients agreed upon. So that seniors could protect themselves from the costs of outpatient care beyond the value of the vouchers, the government could liberalize the popular, private, Medigap plans, to allow them to cover extra physicians’ fees. This would be (somewhat) similar to France, where the government recognizes that its fee-schedule is inadequate and allows many physicians to charge extra, the balance usually being covered by private insurance.

The AMA has every right to protect its business interests, but the Medicare crisis is too far gone to allow those interests to block real reform.

The SGR formula was designed to collectively punish physicians for excess volume above what Congress thought was needed. From an economic standpoint, it is a futile exercise. Collective punishment for individual actions is not going to accomplish anything except cause physicians to drop out of the program (or limit Medicare caseloads).

This is a classic tragedy of the commons type of problem. The more physicians upcode fees and push volume, the greater the collective punishment. But that only serves to make individual doctors want to push volume even higher to make up for lost fees. Under collective punishment, no provider is competing on efficiency because there is nothing to be gained by doing so.